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Sieren's China: Beijing applies and releases the emergency brakes

Beijing's new stock market rules are no guarantee for stable markets, as this week has shown. But at least they prevent the situation from temporarily worsening, says DW's Frank Sieren.

Buy, offload and shed - that was the motto of investors in China in the new year. The China Securities Index (CSI) has twice plunged this week by more than 7 percent. The sell-out on the Chinese stock markets was in part triggered by poor economic results from the processing industry and a weakening of the Chinese currency against the US dollar. The international markets also reacted uneasily. In Tokyo, Japan's leading index on Thursday fell below the psychologically important mark of 18,000 points for the first time since mid-October. The shockwaves from Asia continued to make their way towards the West.

China's regulatory authorities had long announced that they would pull the plug in such a case. Trade was suspended. This move was enabled by a new protective mechanism that came into effect on 1 January and ironically has already been used twice within the first week of its application. It allows trade to be suspended for 15 minutes if the CSI 300 falls by more than 5 percent and by more than 7 percent during the rest of the trading day. This new rule emerged from the turbulences of last year. The China Securities Regulatory Commission (CSRC) introduced this emergency brake in December after the ups and downs on the Chinese stock markets and losses of up to 40 percent last summer. But on January 7, the commission decided to suspend this so-called circuit breaker mechanism until further notice.

Plunge not foreseeable at the end of 2012

For a long time, there was no sign that such intervention would be necessary. Investors in China did not rock the boat, despite the poor economic data. Furthermore, a series of government measures was introduced to stabilize the markets: The central bank lowered the interest rates several times, thus making money cheaper. This meant that banks were able to give out more loans. Pension funds had to invest more than 30 percent in shares, which allowed up to 150 billion euros ($162.5 billion) to flow into the markets.

DW's Frank Sieren

Banks and insurers were also called upon to buy more shares. The stock exchanges in Shenzhen and Shanghai lowered the transaction fees. Sanctions were imposed for betting on falling stock prices. The CSRC has just endorsed the extension of a six-month stock sales ban that was imposed in July on investors and big shareholders with over 5 percent shares in businesses. This is all supposed to prevent anything worse from happening.

Intervention to secure stability

In view of the People's Republic of China's important economic reforms, it is not surprising that Beijing, despite all the criticism from the West, has decided to intervene as China's gamblers run riot. The state intervenes over and over again when economic turbulence threaten China's stability. The communist party decides when and how. We can expect this to continue this year as well.

By the way: The situation is not very different in the West, but there, state interventions are hidden behind expressions such as "quantitative easing," "liquidity injection" or "bailout." Last year, on July 8, the New York stock exchange suspended trading for more than three hours. A computer malfunction was named as the reason. Up to the same date, the Chinese markets had fallen by almost 30 percent within three weeks.